Under the new tax law, starting in 2018, many people will be able to take advantage of the increased standard deduction instead of itemizing their state and local taxes, mortgage interest, donations, etc. What if you are a borderline case where your standard deduction and your total itemized deductions are about the same amount? Bunching your charitable contributions can give you and advantage.
Bunching means paying and deducting two or more years of planned charitable contributions all at once. Since most individuals are required to deduct their charitable contributions when they are paid, bunching can cause one's total itemized deductions to exceed the standard deduction in the "bunching" year. A large itemized deduction translates into lower taxes. In the next year or two, the tax payer claims the standard deduction which would have been claimed if there was no bunching.
Let's take an example: Assume a married couple here in New York who consistently pays state and local taxes limited to $10,000 under the new law, home mortgage interest of $12,000 and charitable contributions of $2,000. Their total itemized deductions are $24,000, the same amount as the new standard deduction for married couples. If they don't bunch their charitable contributions they just claim the standard deduction year after year. Now assume they write triple their normal contributions to their favorite charities before the end of 2018, for a total of $6,000. Their itemized deductions for 2018 will be $10,000 plus $12,000 plus $6,000 for a total of $28,000. This is $4,000 larger than their standard deductions, so they will claim the itemized $28,000 deduction. If they are in the new 22% tax bracket, the extra $4,000 deduction will save them $880 in Federal income taxes.
What if our couple's favorite charity has a problem with donors sending three years worth of donations in one year followed by no donations (which makes budgeting difficult), or the couple worries that their favorite charity will be back next year asking for the same, large donation? A possible solution for the couple is to start a "charitable checking account" with a not-for-profit that offers a payment service between donors and charities. This type of account allows the couple to send a large donation to the not-for-profit, tax deductible in that year, but held in the "charitable checking account" for future instructions from the couple. Afterwards, year by year, the couple instructs the not-for-profit to pay parts of the account to their favorite charity on their normal annual schedule. This is a win-win for all parties!
Another solution to keep in mind, for those over age 70 1/2, is to donate directly from an IRA's required minimum distribution (RMD) instead of writing checks to charities. This technique reduces your gross income and by-passes your itemized deduction form. You receive the tax benefit of the donations and still claim your full standard deduction.
If you would like more details or practical advice on how to implement the techniques in this article, please do not hesitate to call or email your tax advisor here at Allied Financial Partners!
Author: Francis M. Celona, CPA, CFP®